NEW YORK — Bank stocks turbocharged a rally across the financial markets Tuesday, and all three major stock indexes posted their biggest gains of the year. The Dow Jones industrial average rose 218 points and closed at its highest level since the last day of 2007.
The Nasdaq composite closed above 3,000 for the first time since December 2000, when dot-com stocks were collapsing.
There was already plenty of good news driving the market higher Tuesday: Retail sales in February increased the most since September, and the Federal Reserve said it expected the unemployment rate to keep falling.
Then the market soared in the final hour after JPMorgan Chase, the country's largest bank by assets, announced that it plans to buy back as much as $15 billion of its stock and raise its quarterly dividend by a nickel to 30 cents per share.
JPMorgan said it was acting with the blessing of the Federal Reserve, which was preparing to announce the results of a review to make sure banks have enough cash to withstand a financial crisis worse than what happened in 2008.
"That's what really made the day," said Jeffrey Kleintop, chief market strategist at LPL Financial.
JPMorgan Chase stock soared 7 percent, and other banks followed. Citigroup and Goldman Sachs gained 6 percent. Banks were easily the best-performing stocks in the market, gaining almost 4 percent as a group.
The Fed had planned to release the results of its review, known as a stress test, for 19 financial institutions Thursday after the market closed. After JPMorgan Chase made its announcement, the Fed pulled a surprise.
The central bank released its stress test results a half-hour after the markets closed Tuesday – two days ahead of schedule. JPMorgan Chase and 14 other financial institutions passed. Four, including Citigroup, failed.
Citigroup stock was down 4 percent in after-hours trading following the Fed announcement.
The Dow finished at 13,177.68, its highest close since Dec. 31, 2007. Tuesday's close put the Dow within 1,000 points of its record, 14,164.53, set in October 2007. All 30 stocks in the Dow closed higher, the first time that has happened this year.
The Nasdaq composite index rose 56.22 points, or 1.9 percent, to 3,039.88.
On Dec. 11, 2000, the last time the Nasdaq closed above 3,000, it was in the middle of a horrifying slide – from a peak above 5,000 in March 2000 to just above 1,100 in October 2002.
At the beginning of 2000, the peak of the dot-com frenzy, investors valued stocks in the Nasdaq composite index at an astronomical 175 times their per-share earnings.
Google was not yet a public company, and the iPod didn't exist. Apple made about $800 million that year. Many Nasdaq companies were Internet startups with high stock prices but big losses.
And many of them failed, taking the Nasdaq down with them.
Jack Ablin, chief investment officer at Harris Private Bank, said the key difference between the Nasdaq then and now is that the technology companies that dominate the index only promised profits 12 years ago.
"The Nasdaq hasn't done much of anything for 12 years, but it's had a huge rally in earnings," Ablin said.
Today, the profits are real. The Nasdaq composite, which includes more than 2,500 companies, trades at about 24 times earnings, according to Birinyi Associates. Apple's profit last year was almost $26 billion.
The Standard & Poor's 500 index closed up 24.87 points, or 1.8 percent, at 1,395.96, its highest level since June 5, 2008. The S&P has gained 11 percent since Jan. 1, more than an average year. The S&P is a 12 percent rally from its record of 1,565.15.
Brian Gendreau, market strategist at Cetera Financial, said stocks could still go higher. Investors are paying roughly 14 times the past year's earnings for the S&P 500 index. The long-term average is closer to 15, and it's not uncommon for stocks to trade higher than the long-term average and for many years.
"Valuations are still very cheap," he said.
The dollar rose against the euro and hit an 11-month high against the Japanese yen after the Federal Reserve assessment. The euro fell to $1.3073 late Tuesday from $1.3150 late Monday. The dollar soared to 83.08 yen from 82.26 late Monday.
The retail sales report showed a gain of 1.1 percent last month. Some of it reflected higher gas prices, but Americans also spent more on cars, clothes and appliances. Department stores had their biggest gains in more than a year. The government also revised its estimates higher for December and January.
A reading of confidence among small business owners also rose in February for the sixth month in a row. The National Federation of Independent Business optimism index reached its highest level in a year, helped by an increase in expected sales.
The rally gained strength in the afternoon when the Federal Reserve said it saw signs of an improving economy and expected the unemployment rate to keep falling. The Fed also said strains in the global financial markets have eased.
The combination of strong retail sales and the Fed announcement dampened hopes that the Fed would buy more bonds to stimulate the economy, and traders dumped U.S. Treasury debt. The yield on the 10-year Treasury note climbed as high as 2.12 percent, its highest since October.
Among companies making big moves:
_ Great Wolf Resorts jumped 27 percent to $5.13. Apollo Global Management said it has agreed to buy the indoor water park operator for $5 a share.
_ Urban Outfitters dropped 5.3 percent, the worst drop in the S&P 500 index. The retailer reported earnings that fell below what analysts were expecting after it had to mark down prices on women's clothing at its Anthropologie and Urban Outfitters stores.
_ Carmike Cinemas soared 17 percent. The Georgia-based movie theater chain reported earnings and sales that far outpaced what Wall Street analysts had expected.
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By MATTHEW CRAFT 03/13/12 07:08 PM ET